WhatsApp deal: for Mark Zuckerberg $19bn is cheap to nullify the threat posed by messaging application

Facebook founder Mark Zuckerberg knows that it pays to feed the hand that
stands to bite you

When Facebook paid $1bn for Instagram, people thought Mark Zuckerberg was off his rocker.

It was spring 2012, and the social network was just weeks away from going public. Would-be investors were already jittery that Facebook would struggle to make money long term, and here was its founder, writing 10-figure cheques for a rival that had never turned a profit.

He negotiated the deal personally, in a matter of days, only informing the board when it was pretty much done and dusted.

Facebook’s directors may have been irked, but Zuckerberg’s swoop turned out to be one of the best moves the company has made.

Instagram was very small at the time – it had just 11 staff – but the photo-sharing service had hit upon a successful formula. It was growing rapidly, and Zuckerberg knew it would become a potential threat to Facebook if he didn’t swallow it up first.

The WhatsApp deal is no different, other than for its order of magnitude. Facebook has agreed to pay $19bn for the instant messaging platform, partly for access to its users, but mostly to ensure it doesn’t get hobbled by this very threatening competitor.

WhatsApp’s figures are astounding. Some 450m people around the world use the instant messaging service each month, and around 1m more sign up to the service every day. Those that do, tend to love it. More than 70pc of its monthly users (including myself) use WhatsApp daily, such that the platform processes an average of 27bn messages.

As Zuckerberg said in his call to analysts on Wednesday evening, “it is the only app we’ve ever seen with higher engagement than Facebook itself”.

A worried Zuckerberg adopted the same approach to negotiating the WhatsApp deal as he did with Instagram, keeping discussions tight and moving as swiftly as possible.

He broached the subject with WhatsApp’s co-founder, Jan Koum, early this month, and had the whole thing tied up 11 days later, barring regulatory and shareholder approval. The $2bn break fee Facebook has embedded in the contract suggests that it is confident it will jump that hurdle.

WhatsApp’s stellar price tag – made up of $4bn cash, $12bn in shares, and $3bn in restricted share awards for its 55 founders and staff – is bigger than any acquisition Google, Apple of Microsoft has ever made, but that is the ransom Facebook is willing to pay in order to protect itself.

It is a very different story to the overtures Google made to WhatsApp last year. The web search behemoth reportedly offered $1bn for the instant messaging service, and then, when it was rebuffed, suggested paying WhatsApp a fee to tip Google off should any other bidder come forward.

It was an unorthodox tactic that hinted at desperation, but also one that highlights the enormity of what is at stake here. The giants of Silicon Valley are no longer in the business of buying businesses because of what they will contribute to their bottom lines. They are involved in a land-grab for companies that might grow up to be a threat in the future or – even worse – to become allies of their rivals

Valuations are not determined by multiples of profits or revenues; they are determined by user numbers. And it feels likely that they will surge.

Whilst the next generation of tech entrepreneurs get used to the sound of multi-billion dollar valuations, the industry’s grandees are learning their own valuable lesson: that it pays to feed the hand that stands to bite you.